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The sudden demise of meal kit company Chef'd this week was another reminder that one of the fastest-growing spaces in food is also proving to be one of the most difficult to figure out.

With a low barrier for entry, the meal kit market has become infiltrated with more than 150 companies, according to Packaged Facts. But as manufacturers of the pre-portioned meals grapple with how to reach profitability, keep subscribers from fleeing and adapt to changing consumer preferences, those in the industry warn of further consolidation.

"Quite frankly, it is a difficult business model. To be profitable in that space requires a lot of discipline, requires a lot of knowledge when it comes to your operations," Max Dresse, associate director of product innovation with HelloFresh US, said on a panel at the Digital Food and Beverage 2018 conference in Chicago. "We've seen with some of our competitors that they are really struggling on the operational side, so what we believe in this space is that there is going to be less and less brands."

Dresse estimated within five years, there will be between three and five meal kit providers dominating the market as some of the smaller players today go out of business or are acquired. For its part, HelloFresh purchased Green Chef earlier this year, adding organic, vegan and gluten-free menus — as well as paleo and keto meals — to its meal kit offerings.

But Dresse cautioned that near-term competition and other ongoing difficulties plaguing the segment will require those that remain to keep changing and adapting.

"Quite frankly, it is a difficult business model. To be profitable in that space requires a lot of discipline, requires a lot of knowledge when it comes to your operations. ... We believe in this space is that there is going to be less and less brands."

Max Dresse

Associate director of product innovation with HelloFresh US

HelloFresh, which has yet to turn a profit but expects to breakeven in the fourth quarter before costs like interest and taxes are removed, has higher operating margins and more stable customer acquisition costs than some competitors in the space. These have allowed it to attract subscribers at the expense of rivals. HelloFresh recently pulled ahead of Blue Apron as the largest meal kit provider in the U.S.

"You have to rethink your business model constantly to stay relevant," he said.

Some meal kit companies may have thought they could start a business and the subscribers would follow. Data from Second Measure backs that up assessment. HelloFresh, Blue Apron, Home Chef, Sun Basket and Plated control the majority share of sales in the U.S.

Chef'd, like dozens of other meal kit companies, was such a distant player that it didn't even register in the top eight, likely sporting a share below 1%.

In addition to Chef'd, former meal kit companies Sprig, SpoonRocket and Maple Food have collapsed. With sales growth slowing in the sector, that could put pressure on the weaker companies that remain to improve their businesses, find buyers or be forced to close.

"The challenge with a lot of these brands is a lot of folks thought, 'Oh, I ... can just slap a name on it and suddenly the business will show up,' " said Richard DeNardis, chief revenue officer at Home Chef. He noted his company has disciplined financial approach to marketing that will help it reach its first full year of profitability in 2018. "You're driving the foot traffic, unlike a traditional retail environment where you get the shopper" to walk into the store.

From online to the endcap

Once synonymous with the web, meal kits have been rapidly gaining a bigger presence in retail stores as manufacturers of the premade foods look to expand their operations and add new subscribers who continue to value convenience when it comes to meal planning.

"The challenge with a lot of these brands is a lot of folks thought, 'Oh, I ... can just slap a name on it and suddenly the business will show up.' "

Richard DeNardis

Chief revenue officer, Home Chef

Other retailers have spent millions of dollars to purchase already established meal kit companies. Kroger acquired Home Chef in May for $200 million, plus $500 million in additional incentives if the company hits performance goals around online and in-store sales. And Albertsons' purchased Plated in September after research from the grocer showed 80% of its customers said they wanted meal kits in stores.

"This move advanced a shared strategy to reinvent the way consumers discover, purchase, and experience food," Pat Brown, Albertsons's vice president of strategic business initiatives, told Food Dive in an email. "In teaming up with Plated, Albertsons Cos. added a meal kit company with leading technology and data capabilities, a strategic step for the company as it continues to focus on innovation, personalization, and customization."

By offering their wares online as well as in brick-and-mortar outlets, meal kit providers increase their brand awareness among customers and gain bigger scale, helping improve margins and obtain a better return on their marketing dollars. It also gives them another way to reach consumers who may vacillate between ordering their kits online or purchasing them spontaneously at the grocery store.

Getting more aggressive

For retailers, meal kits represent a rare segment of meaningful growth that allows them to capitalize on shopper demand for fast, fresh and convenient. It’s still a niche that has room for expansion, with 9% of Americans claiming to have purchased a meal kit in the last six months, and 25% of consumers — or 30 million households — would consider trying one in the next six months, according to Nielsen.

While online sales still command the lion’s share of the $5 billion meal kit market, Nielsen estimated that in-store meal kits generated $154.6 million in sales in 2017, an increase of more than 26% from the prior year. Globally, Technomic said subscription-based meal kits are expected to reach $10 billion in sales by 2020.

Matt Thompson, vice president of Kroger's click-and-collect service known as Clicklist, said Home Chef was a way for the grocery giant to expand its reach to serve the consumer "anytime, anywhere." He told Food Dive that the purchase of Home Chef is about accelerating its presence in areas that would take too long or be too expensive on its own. The goal is getting it out in front of where the consumer is, and where she is going, as quickly as possible. It also gives Kroger an instantly recognizable name that many shoppers associate with meal kits.

"It's just moving so quickly and we look at these partnerships. For us, they are about acceleration," he said. "We look at online and the way that we can move and behave when you're not tied completely to brick and mortar. It's a different speed. It's a different audience, and it causes you to look at different ideas and get more aggressive."

For both Albertsons and Kroger, their investments in meal kits show signs of paying off in their e-commerce endeavors. Same-store sales at Kroger during its first quarter increased 1.4%, marking the fourth-straight quarter of comparable growth for the grocery giant, while digital sales rose 66%. Albertsons this week reported a 108% increase in e-commerce sales during Q1 2018 as it benefited from the integration of Plated. The meal kit is currently being offered in 350 stores, with hundreds more expected to come online this year, Brown said.

Helping brand awareness

HelloFresh's Dresse said the company worked for two years to perfect its recipes and the variety of meals it offered before making the move to retail. It increased the shelf life of its grocery-based kits to 14 days, compared to a week for those sold online — a necessary step, he said, that factors in the time it takes to transport the kit, sell it and ultimately consume it.

"It's definitely a space we could be playing in today. We have low household penetration and awareness of a lot of our brands, (meal kits are) a good way for us to be able to get these brands into consumers that might not have not been in their consideration set."

Nicole Vinson

Director of e-commerce, Hain Celestial

The German company also had to change how often it rotates the recipes it offers in stores. While it refreshes meals every week on its site, it's more cautious at the store because some customers need to see a meal a few times before they decide to try it.

"It's a different mindset in the retail space, where we can't rotate recipes that often," Dresse said. "On the other hand, you still want to be relevant so you have to find the right balance."

In a testament to how important meal kits are for the food space — despite the challenges that faced Chef'd and others — in HelloFresh's early days, Dresse said it approached many of the CPG brands lining the stores where its kits are starting to appear. Today, HelloFresh is the one being approached, he said. And it isn't just his company. Everyone from PepsiCo to Conagra and Hershey to Campbell Soup have at some point struck deals with meal kit providers to use their products.

Nicole Vinson, director of e-commerce for Hain Celestial, said the food company could see itself partnering with a meal kit provider as a way to encourage consumers to try their products and widen distribution for some of its natural and organic brands.

"I don't want to perceive it as a strategy that we're taking, but it's definitely a space we could be playing in today," Vinson told Food Dive. "We have low household penetration and awareness of a lot of our brands. (Meal kits are) a good way for us to be able to get these brands into consumers that might not have not been in their consideration set."